Private Equity and Senior Debt

Private equity and senior debt finances cater to the credit needs of business organizations. In business deals, which are sponsored by private equity, usually senior debt stands out as the cost effective medium of capital availability. Hence, it is wise to maximize the component of senior debt in such deals.

More on Private Equity and Senior Debt

Senior Debt is a component part of financing through Private Equity. The amount of senior debt available to business concerns is directly linked to their asset base. It also depends on the amount of cash generated from the operations of the company. Different commercial lenders follow different policies for credit structuring. Some prefer an asset based approach while others focus more on the cash flow. Some seasoned commercial lenders follow a criterion which calls for a mix of both asset base and cash flow.

More on the Lenders in the Private Equity and Senior Debt Business

Lenders catering to the Private Equity and Senior Debt market can be classified into the following:

• asset based lenders
• cash flow based lenders

Asset based lenders determine the collateral value of the borrower through the analysis and audit of the following:

• receivable accounts
• real property
• inventory and
• fixed assets of the borrower

Receivable accounts can act as loan collateral subject to certain conditions. The factors behind this include the following:

• customer quality
• customer payment pattern
• frequency of receivable collection
• concentration of resources in selective accounts, if any

Lenders normally advance around 80% vis-a-vis the eligible receivable accounts. Inventory of the borrower is reviewed for its eligibility as the borrowing base. Raw materials for production and finished products are liquid assets in comparison to unfinished products. They can be sold off easily. Eligible inventory can attract around 50% advance from lenders.

Cash flow based lenders operating in the private equity and senior debt market look into the past cash flow records of the borrower, among other things, to determine the amount of their advance. There is a concept of "Debt Service Coverage Ratio" or DSCR. The standard minimum level acceptable to lenders stands around 1.25. The components that goes into the calculation of DSCR include the following:

• interest
• amortization
• taxes
• cash capital expenses
• depreciation and the like